'Repayment-by-Purchase' Helps Consumers to Reduce Credit Card Debt

64 Pages Posted: 16 Nov 2020

See all articles by Grant E. Donnelly

Grant E. Donnelly

Ohio State University (OSU)

Cait Lamberton

University of Pittsburgh

Stephen Bush

Commonwealth Bank of Australia

Zoe Chance

Yale School of Management

Michael I. Norton

Harvard Business School - Marketing Unit

Date Written: November 6, 2020

Abstract

Many consumers struggle to repay their credit card debt, in part because paying small portions of large bills often feels fruitless. We introduce a novel credit card payment option – repayment-by-purchase – and examine its influence on both the amount consumers’ repay and their perception of progress toward reducing their debt. With typical repayment, consumers simply enter the amount they wish to pay toward their total balance – often the minimum required payment. With repayment-by-purchase, in contrast, consumers can select specific purchases (e.g., a coffee at Starbucks, a utility bill) that they wish to repay, and make payments specifically directed toward “eliminating” these purchases. Five studies reveal that repayment-by-purchase increases awareness of what is being repaid, which increases perceptions of progress toward reducing debt, which in turn encourages higher repayment. In a large field experiment, credit card customers who were given the opportunity to allocate their payment toward specific purchase categories paid 12.18% more toward their debt balance than a control group. These findings advance our practical understanding of how consumers can be encouraged to pay more toward credit card debt and offer conceptual insight into how both increased awareness and perceived goal progress enhance consumer motivation to get out of debt.

Keywords: consumer debt, goal pursuit, goal progress, financial decision-making, personal finance

Suggested Citation

Donnelly, Grant E. and Lamberton, Cait and Bush, Stephen and Chance, Zoe and Norton, Michael I., 'Repayment-by-Purchase' Helps Consumers to Reduce Credit Card Debt (November 6, 2020). Harvard Business School Marketing Unit Working Paper No. 21-060, Available at SSRN: https://ssrn.com/abstract=3728254 or http://dx.doi.org/10.2139/ssrn.3728254

Grant E. Donnelly (Contact Author)

Ohio State University (OSU) ( email )

Blankenship Hall-2010
901 Woody Hayes Drive
Columbus, OH OH 43210
United States

Cait Lamberton

University of Pittsburgh ( email )

135 N Bellefield Ave
Pittsburgh, PA 15260
United States

Stephen Bush

Commonwealth Bank of Australia ( email )

1 Locomotive St
South Eveleigh, NSW 2015
Australia

Zoe Chance

Yale School of Management ( email )

165 Whitney Ave
New Haven, CT 06511

Michael I. Norton

Harvard Business School - Marketing Unit ( email )

Soldiers Field
Boston, MA 02163
United States

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